US toughens rules for big foreign banks to stave off collapse

WASHINGTON--The Federal Reserve will require the largest foreign banks operating in the United States to hold higher levels of capital reserves to protect against potential loan losses.

The stricter regulations the Fed adopted Tuesday are intended to prevent the types of threats that contributed to the 2008 financial crisis. The requirements are similar to those already adopted for big U.S. banks.

Fed Chair Janet Yellen, presiding at her first public meeting of the central bank's board, said the changes will “help address the sources of vulnerability” exposed by the crisis. The rules were adopted by a 5-0 vote.

Foreign banks had objected to the changes. They argued that the stricter rules would raise the cost of doing business in the United States and reduce the loans they could provide.

Sally Miller, chief executive of the Institute of International Bankers in New York, said her organization was pleased that the Fed had made some adjustments to the rules. The adjustments include extending the date by which foreign banks must comply until July 2016, one year later than originally proposed. But she said her group still felt the rules were too onerous.

“We continue to have a fundamental disagreement with the Fed about the appropriateness and necessity of applying an extra layer of U.S. bank capital requirements,” Miller said in a statement.

John Corston, a director at accounting firm Deloitte who specializes in regulatory and banking issues, noted that the Fed's rules were adopted with only minor revisions and had been expected. Corston said the requirements should “go a long way to address some of the issues that we faced during the crisis,” which was triggered after investment bank Lehman Brothers collapsed.

The rules will require overseas banks with at least US$50 billion in assets operating in the United States to set up a subsidiary bank holding company in the United States that will be subject to the same requirements in such areas as capital reserves and leverage as U.S. bank holding companies.

The Fed was ordered to toughen its regulations for large banks that could threaten the entire financial system under the Dodd-Frank Act that Congress passed in 2010 in response to the financial crisis.

International fractional banking has the same reserves as all American banks and since the Fed has manufactured more notes than any Central Banks of any other countries. If these reserves are inadequate than all American bank's reserves are also inadequate, as they indeed are. The Federal Reserve Bank of New York tells us: "Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing and "Banks are creating money based on a borrower's promise to pay (the IOU)... Banks create money by 'monetizing' the private debts of businesses and individuals. In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount. This partly is a matter of law; currency has been designated "legal tender" by the government—that is, it must be accepted. Modern monetary systems have a fiat base—literally money by decree—with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. The decree appears on the currency notes: "This note is legal tender for all debts, public and private." While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composed to thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federal government requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for the pure fiat dollar.